Recession 'on verge of being over'

The recession that has gripped the UK for six years is on the verge of being over after a leading economic body said the economy is almost back to its pre-financial crisis peak.

Growth will exceed its 2008 high in the next few months, t he National Institute of Economic and Social Research (NIESR) said in a report today.

The institute predicts that gross domestic product (GDP) will grow by 2.9% this year, an increase of 0.4% on its estimate of just three months ago.

Forecasts for 2015 through to 2017 are about 2.4%, although GDP per capita remains well below its previous peak and is not expected to exceed that before 2017.

Jonathan Portes, director of NIESR, told The Times: "The end of the Great Recession, it is an important moment. The British economy is very close to being bigger than it has ever been.

"Symbolically, that matters, and it comes at a time when growth is clearly entrenched."

His colleague Jack Meaning, a research fellow at the institute, added: "We are incredibly close to the pre-recession peak. Whether we make it in the April estimate will be a matter of 0.1%."

Growth accelerated rapidly after the marginal gains of 2012, NIESR said, and is now running at around 3% year-on-year.

But while wage levels are also expected to grow this year in real terms, they remain around 6% below what they were in 2009 - ground that is not expected to be made up until at least 2018.

Unemployment rates are also improving, falling by 1% over the last year. NIESR said it expects unemployment to average around 6.5% this year before dropping to close to 6% from 2015.

But despite the robust rise in employment, productivity growth has fallen.

"Even the return of GDP growth, however, has not yet resulted in significant productivity increases," the report said.

"This matters in the short run, since without any improvement in productivity, robust economic growth will see spare capacity absorbed relatively quickly; it matters even more for the medium to long run since ultimately productivity is the main, if not the only, driver of real wages and overall prosperity."

Inflation is also under control, NIESR said, in part because rises in wages are subdued, and the institute expects inflation to remain around the target of 2%.

Yesterday the Bank of England announced it was keeping interest rates at their historic low of 0.5%, a level they have been at for more than five years while the Bank tried to nurse the economy back to health.

It also left the scale of its quantitative easing programme to boost the money supply unchanged at £375 billion.

The Bank will update its own forecasts for GDP growth and inflation at its quarterly inflation report next week.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) has hiked its UK growth forecast to 3.2% and sounded a warning that action may be needed to cool the housing market.

Figures from Halifax showing a second consecutive month-on-month fall in house prices in April - though they were 8.5% up year-on-year - looked likely to ease concerns about an overheating market.

On the basis of current monetary policy, the NIESR said it expected public sector finances to be in surplus by 2018-19.

Mr Portes told BBC Radio 4's Today programme: "It is quite important symbolically that the economy is, or will very shortly be, bigger than it was in 2008.

"But as far as individuals are concerned what really matters is how rich we are - per capita GDP - and that's well below the level of 2008 and won't get back to its previous level for a couple of years.

"In fact, real wages - take-home pay deflated by inflation - is about 6% lower than it was then and won't get back to its previous 2008 peak before, we reckon, another three or four years."

He added: "We are back on trend, we are back on the previous path, but we haven't made up the lost ground. In previous recessions usually what has happened is that we've had a big bounceback, so you lose the output but not only do you grow faster than trend but you get back much of what you've lost relative to trend.

"We, and most others, are saying we are not going to get back a lot of that lost ground this time. We are going to lose maybe 10% or 12% of output compared to pre-recession trend."